“Finding the right medicine – how to fix the problems between doctors and their pension scheme” – analysis and recommendations from Royal London, plus new case study. With growing reports of senior NHS staff cutting their hours or even retiring because of pension tax issues, Royal London has published a new policy paper explaining the issue and reviewing the various solutions on offer.

One doctor spoken to by Royal London in preparation of this report said that action was needed ‘so that consultants can go back to talking about patients rather than pensions’. Others pointed out that NHS ‘waiting time initiatives’ to drive down patient waits were being undermined by the effects of the pension tax regime. Doctors reported inventing ‘DIY’ solutions to these issues including what has become known as the ‘hokey-cokey’ approach, involving being a member of the NHS pension scheme for one month, opting out for eleven and then repeating the process again the next year in order to avoid big tax bills.

Key conclusions of the report include:
- This issue is likely to bite much more in 2019/20 than in previous years; this is because the ability to ‘carry forward’ unused annual allowances from up to three previous years will now only go back to 2016/17 – the first year when the tapered annual allowance was in force; previously, doctors could ‘carry forward’ from 2015/16 when no reduction applied;

- One option – favoured by the Chancellor in his recent evidence to the Treasury Committee – is to make changes within the NHS Pension Scheme and/or NHS pay arrangements; but the report finds that these would largely be ‘sticking plaster’ solutions for a more fundamental problem

- The best solution would be to remove a complex and unpredictable feature of the tax system – the tapered annual allowance – even if this required a reduction in the overall annual allowance;

Commenting, Steve Webb, Director of Policy at Royal London said: “It is utterly absurd that doctors are having to consider their pension tax position before deciding whether or not to take on an additional shift or cover for an absent colleague. The NHS is structured around senior clinicians taking on additional roles and responsibilities and this whole culture is being undermined by a bewildering system of pension tax relief. Rather than tinkering with the NHS pension scheme, the Treasury should abolish the ludicrous and capricious system of tapering annual allowances for tax relief. Patient care must not continue to suffer on the altar of Treasury intransigence”.

The new policy paper: “Finding the right medicine – solving the problems between doctors and their pension schemes” begins by explaining the current system of pension tax relief, including the system of ‘tapering’ annual limits on contributions for those on higher incomes. It points out that the system contains an unwelcome ‘cliff edge’ whereby a small amount of extra earnings can trigger a large tax bill.

Next, the paper reviews options for reforming the NHS pension scheme, noting that other schemes such as the Local Government Pension Scheme and the Universities Superannuation Scheme have been swifter to offer new flexibilities to members. LGPS now offers members the chance of a 50-50 arrangement where they can pay half contributions for half benefits. This would reduce (though not eliminate) the problems faced by some doctors. But none of these changes would deal with the underlying problem of a highly complex and unpredictable tax regime.

The paper therefore looks at the wider system of pension tax relief and at potential reforms which could be brought in relatively quickly to address this issue. It notes that the tapering of the annual allowance does not just affect doctors but also affects self-employed people, those receiving bonuses, and anyone else whose annual income is unpredictable. The paper concludes that reform of the tapered annual allowance would not go far enough and that outright abolition is required. If the Treasury decided that it did not want the overall cost of tax relief to increase, the paper notes that a simple across-the-board reduction in maximum limits on annual contributions would probably be required.

As well as her role as a consultant, Ami Jones is Clinical Lead of the Emergency Medical Retrieval and Transfer Service (EMRTS Cymru), the medical team who work on board the Wales Air Ambulance Charity helicopters. She is a Lieutenant Colonel in the Royal Army Medical Corps and has undertaken two tours of duty in Afghanistan, and received an MBE for her service in 2017

Dr Jones is one of large numbers of consultants affected by the NHS pensions tax issue. Like many senior clinicians, she takes on many additional leadership roles in addition to her regular duties. These additional roles and shifts do not generate any additional NHS pension rights, but they cause Dr Jones’ annual allowance to be reduced because of the ‘tapered annual allowance’ rules. Whilst it might make financial sense for Dr Jones to restrict her hours and her work she has chosen to carry on with these additional roles, despite the negative impact on her finances. But she is aware that many other doctors have felt that they had no choice but to restrict their hours and she can see the strain this is putting on the health service.

Dr Jones said: “My primary goal is to do the best for my patients and I willingly take on extra responsibilities to help me do this. But it does not seem right that doctors who take on extra roles or cover long-term gaps on the rota can find themselves financially penalised. We need a system where all doctors can concentrate on what is right for their patients without having to do complex calculations about their pensions or tax bills”.